Why Johnson Controls Stock Is Down Today


Earnings were fine, but the company faces headwinds in China.

Climate control and building automation specialist Johnson Controls International (JCI -7.10%) delivered an earnings beat before the market opened Wednesday, but sales were a little bit below expectations. Investors appear to be nervous about how the rest of the year will progress, and sent shares lower in morning trading. As of 11:12 a.m. ET, the stock was off by 7.6%.

Weakness in China offset strength elsewhere

In its fiscal second quarter, which ended March 31, Johnson Controls earned $0.78 per share on revenue of $6.7 billion, beating Wall Street’s consensus earnings estimate by $0.03 per share despite revenue that was about $20 million below expectations.

North America was the standout region for the industrial products manufacturer, growing sales by 9% and margin by 110 basis points year over year. But continued weakness in China caused revenue from the Asia/Pacific region to decline by 26%, and the company’s profit margin there decreased.

Management forecast that its fiscal third-quarter earnings would come in at between $1.05 per share and $1.10 per share, below Wall Street’s consensus estimate of $1.12 per share, but it maintained its full-year guidance for earnings of $3.60 per share to $3.75 per share. That implies some potential for it to beat the market’s $3.60 per share average estimate.

Is Johnson Controls stock a buy?

Johnson Controls is both predicting weakness in its fiscal Q3 and holding firm on its full-year estimates. Reading between the lines, it appears that management is counting on a lot of things going right in the fourth quarter.

Unfortunately, there is a lot that is out of management’s control. Right now, demand for its products in North America is holding up surprisingly well after a year of worries about the impact of inflation and the risk of an economic slowdown. Ideally, the solid domestic trends will continue and China will begin to bounce back.

But if that ideal scenario doesn’t play out, management will likely need to adjust its estimates downward. Investors considering buying Johnson Controls stock now need to be aware of the potential downside, and would be wise to tread carefully until there is more clarity on the economic outlook, both in the U.S. and China.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.



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